Trump is taking his first steps towards energy deregulation

The first step is to gut fuel efficiency standards for cars and light trucks.

The move would roll back CAFE, or Corporate Average Fuel Economy.

Any changes are likely to be contested through litigation.

The Trump administration is laying the groundwork to gut fuel efficiency standards for U.S. cars and light trucks, one of the signature achievements of the Obama era.

The EPA has readied a final determination that calls for the rolling back of corporate average fuel economy (CAFE) standards, according to the Wall Street Journal. The current standards would require automakers to sell vehicles that average 54.5 miles per gallon by 2025.

This move by the White House will likely be subjected to litigation. Putting regulations in place requires a lot of legwork and several years of procedure. Undoing them is not all that much easier.

The CAFE standards are a fleet-wide average, which means that a company, such as Ford, can still sell vehicles that do not meet the fuel efficiency standard so long as their entire fleet averages out to that level. So, for every inefficient SUV that the company sells, it will need to also sell a lighter car, a hybrid, an EV, or simply a more efficient SUV, to raise the fleet average.

However, carmakers are now trying to argue that it will be difficult to achieve the tighter fuel efficiency standards because cheap gasoline has led to a resurgence of interest in SUVs and pick-up trucks.

To complicate matters further, California has long held a waiver from the EPA to set its own standards, a quirk that dates back to the state's smoggy days from decades ago. California, unlike other states, can set tighter standards than federal law dictates. As a result, California has the ability to lead the nation in tightening fuel efficiency, dragging the rest of the country along.

If the EPA roles back federal standards, but California doesn't, that would leave a mess on the hands of the auto industry. Carmakers aren't going to produce certain cars for California, and certain cars for the rest of the country. The patchwork would be a headache, which is exactly why auto companies were content with the Obama-era rules, even if it meant a ratcheting up of fuel efficiency requirements.

Indeed, 13 big automakers signed off on these fuel efficiency standards years ago, way back in 2011 (the rule was finalized in 2012). It was a landmark agreement that promised to dramatically reduce oil consumption in the United States. There was little to no dissent on these standards from the auto industry.

But that changed after Donald Trump was elected. Big auto companies spotted an opportunity that seemed to be all but impossible until he came to office.

The EPA is expected to publish its determination by April 1.

For the EPA to truly be successful at undoing the fuel requirements, it might need to neuter California's authority at setting its own fuel standards. That has California officials readying to do battle with Washington. "California paved the way for a single national program and is fully committed to maintaining it. However, we feel that this rumored finding—if official—places that program in jeopardy," a spokesman for the California Air Resources Board (CARB), which regulates air quality, told the WSJ.

The auto industry says that the cost of complying with the standards would reach $200 billion and lead to job losses. It should be noted that the industry titans have often predicted doom and gloom over regulations in the past, warning of the imminent and swift collapse of the American auto industry, only to quietly comply without so much as a hiccup once the rules are in place. In fact, earlier CAFE standards have proven wildly successful, raising fuel efficiency and innovation while not significantly raising the cost of production.

More to the point, automakers were supportive of these specific regulations before Trump came into office.

The CAFE standards are some of most effective at bending the oil demand curve, especially since there are few other measures of such scale targeting oil consumption. Rolling back the current CAFE standards would be particularly notable because of the timing. Requiring automakers to up their game to 54.5 mpg would erase about 2 million barrels of oil demand per day by 2025. This comes against a backdrop in which oil market analysts such as the IEA are raising the alarm about a potential supply crunch in the 2020s as U.S. shale output plateaus.

The supply shortage will be a lot more painful if the U.S. government undercuts one of its most effective tools by undoing fuel efficiency standards.